How Does the ACA Handle Premium Surcharges for Smokers?

Janet Weiner, Associate Director of Health Policy at the Leonard Davis Institute of Health Economics at Penn, posted a useful little article today on how the Affordable Care Act will deal with premium surcharges for smokers. I’m not going to put a ton of analysis into this issue here, but figured I’d share the information since it’s helpful and interesting.

On the pre-ACA market, smokers could expect to pay about 15-20% more in their health insurance premiums than non-smokers of comparable background. In the small group and individual markets under the ACA, however, insurers will now be able to levy a surcharge of as much as 50% of the value of the premium to smokers. That 50% is tacked on to the value of the plan before subsidies, if they apply, meaning that a smoker who is eligible for subsidies could see any subsidy-based savings totally wiped out by smoking surcharges.

There are, as Weiner notes, caveats. In the small group market, for example, a surcharge can only be imposed if the plan in question also covers a smoking cessation program for the smoker in question. Additionally, some states have prohibited insurers from assessing the surcharge while others have lessened the maximum amount.

Smoking behavior is determined by beneficiary self-reporting, but a spokeswoman for Blue Cross Blue Shield says that there are powerful disincentives to lying. If smokers lie in order to evade the smoking surcharge and the lie is found out–if, for instance, smoking is found to be the cause of an illness or health complication that they develop–then the policy can be rescinded on the basis of fraud. The controversy over rescission prior to the passage of the ACA involved insurance companies rescinding policies after beneficiaries fell ill with an expensive-to-treat illness by quibbling over minor mistakes on paperwork. Based on the limited reading I’ve done on this specific topic, the fraud-based rescission that’s apparently allowed by the ACA seems unobjectionable by comparison.

One does wonder what the 50% surcharge cap really means. Is it simply that–a cap? Or is there a reason that inflated smoker premiums were held at 15-20% increases before, and should we actually expect them to increase under the Affordable Care Act? (I’d anticipate that we will see insurers assess the maximum allowable surcharge as a means of making up revenue lost under the guaranteed issue, mandatory coverage, and community ratings provisions. As they are unable to charge higher premiums for beneficiaries with a high risk profile, they will likely look to make up the revenue elsewhere. That, however, is not really what I’m talking about here).

In other words, why wasn’t a 50% surcharge assessed before? Did state governments do something to prevent this, or did the standard 15-20% premium increase simply reflect an actuarially fair risk valuation for insuring smokers against health risks? I don’t know the answer, but if anyone does, I’d be interested to find out.

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